Gold Gets Uppity, But Is It Real?

  • Gold has rallied over $100 in the past two weeks.
  • Is it a sustainable trend or another false alarm?
  • What evidence backs up the move?

Good morning on this fine Tuesday.

Goodness, I’ve been pissed off at gold’s movements for as long as I can remember.  Cynically speaking, this is probably a false start.

But other reputable people have been sounding the alarm over the relationship between the stock market and the money supply.

As you well know, I’ve been moaning about the Fed’s insane expansionary monetary policy for a  while.

Things may finally be coming to a head.

Let’s have a look.

First, the Gold Chart

The purple circle indicates why a bunch of commentators noticed what’s going on in gold.

Gold rallied hard in the past two weeks despite its lackluster performance over the past year or so.

What caused it?  With Bitcoin at $62,000 and Ethereum at nearly $4,400, it’s not like investors are leaving crypto to get back into gold.

As gold has led us down the garden path a few times, I want to see $2,100 before I start believing in the yellow metal again.

But the money supply issues remain.

The SPX to M2 Ratio

Ok, now we can begin to feel the heat a bit.

If you notice from the above chart, the SPX/M2 money supply ratio has reached above 0.21.  That may mean nothing to you, but that usually means big trouble for the stock market.

What’s M2, you ask?  Here’s how the Fed itself explains it:

Before May 2020, M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000) less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market funds (MMFs) less IRA and Keogh balances at MMFs.

Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.

Succinctly, it’s the measure of money supply we use to forecast future inflation.

When this ratio first got out of control in the 1990s, it blasted past the 0.21 mark all the way to 0.314.

That was during the insanity of the dotcom, a genuinely once-in-a-lifetime event.

Or was it?

Since the peak right around New Year’s Day 2000, we’ve hit 0.21 three times.  Once in 2007, once in 2020 just before the Covid crash, and now.

Does that mean we’re heading for an imminent sell-off?

I’m inclined to think we’ve got more room to run.

Why?

First, because I’ve underestimated the State’s resolve to keep this train going too many times.  And second, I think this time period will be remembered as “Tech Crash 2.”

Back in 1999, everything was tech, and those stocks were never going down.  And those companies had a power which, up to that point, was unrivaled.

Sound familiar?

Let’s look at one more piece of information: the Buffett Indicator.

The Buffett Indicator

I’ve shown you this before, but it’s worth updating.

Before we do that, let’s define the Buffett Indicator.  It’s the ratio of total United States stock market valuation to GDP.

Warren Buffett once called the ratio “the best single measure of where valuations stand at any given moment,” though he’s since cooled on it. 

As of November 11, 2021, Current Market Valuation calculates this ratio as 215%.

Credit: https://www.currentmarketvaluation.com/models/buffett-indicator.php

As you can see from the above chart, the stock market is running hot.

The last time the ratio got this high was the dot-com bubble in 2000.  This leads me to believe this is indeed Tech Crash 2 in the making.

Again, timing is tricky.

I don’t think you should sell everything right now.  In fact, I think the opposite.

We may still have a long way to go before it all goes to hell.

But if it does blow up within the next six months, 2022 will get much more interesting.

Implications for the 2022 Midterms

Already reeling from his incompetence, Biden has put the Democrats in a weaker position for the mid-term elections.

Kamala is MIA.  Pelosi and Schumer are celebrating their Pyrrhic victory with the infrastructure bill.

Manchin and Synema will continue to press for lower spending from their conservative (though Democrat-voting) strongholds.

If the market tanks, Biden has nowhere to run.

The Dems will lose both the House and Senate, and Biden will be a lame duck for a full two years before his term expires.

Though I don’t wish anyone any financial pain – especially those close to retirement – I couldn’t be happier with a political outcome that handcuffs Biden.

That’s why I think Presidents who take credit for stock market rises are playing with fire.  I thought Trump was crazy to do so, especially after Candidate Trump called the US a “false economy.”

As Biden has stolen Trump’s playbook in this way, he’s set himself up for a load of bad press.

After all, if the market went up because of Biden’s policies, indeed Biden must take the same credit on the way down.

Silliness.  But let that silliness play into our hands.

In the meantime, keep learning, growing, and expanding your skillset.

And keep a weather-eye out for the impending “big one.”

As Bugs Bunny once said, “Watch that next step.  It’s a doozy!”

All the best,

Sean

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